Even though nobody prays for them, an emergency happens and it is in your best interest to be prepared for it. It could be a blown transmission on the car, or even worse, the loss of a job. How prepared you are for one of these situations can make all the difference in a stressful time.

But 45 percent of Americans say they do not have enough savings to cover at least three months of living expenses, according to a report by the Center for Financial Services Innovation.

By taking steps to start an emergency fund you’re giving yourself the security of knowing you can cover unexpected expenses should the need arise. So don’t let lack of money stop you from starting an emergency fund, follow the advice provided in this article and succeed.

• How can you Start an Emergency Fund?
• How Much Money Should you Have in Your Emergency Fund?
• Where can I Build an Emergency Fund?
• How Long Should it Take to Build an Emergency Fund?
• What is Emergency Fund Used for?
• How Much Should I Save Each Month for Emergency Fund?
• What are Examples of Emergency Expenses?
• What do you do with Money After an Emergency Fund?

How can you Start an Emergency Fund?

It’s a good idea to make an emergency fund one of your highest savings priorities. Put $20 a week in an emergency fund and your account will grow to over $1,000 in just one year. That’s often enough to cover a repair bill or emergency travel. An emergency fund can also shield you from the high cost of borrowing, and keep you from hydroplaning into debt.

Read Also: How to Manage Money Successfully as a Couple

It may take time to build an emergency fund, but there’s no need for the process to feel stressful or overwhelming. It’s all about having a plan, and these four steps to start an emergency fund can help guide you:

1. Start with baby steps

“Every financial expert sets some number as a benchmark for emergency funds—anywhere from three to six to 12 months of expenses,” says Kerri Moriarty, head of company development for Cinch Financial, a Boston-based startup building financial software. “For most people, that’s just downright aspirational,” especially, she adds, when paying student loans, a credit card balance and rent or a mortgage.

Saving six months or more worth of expenses can feel daunting. That’s why it’s so important when figuring out how to start an emergency fund to begin with small goals and gradually work up to your long-term objective.

“Reduce your frustration and risk of de-motivation by setting milestone goals to work toward,” Moriarty says. “For example, building up $500 in emergency funds, then $1,000, then $2,500 and so on until you watch yourself tracking to one month or three months or six months covered.”

2. Choose a place to keep your emergency fund

When you start an emergency fund the purpose is to have quick, easy access to your cash. To accomplish this, consider keeping at least the first three months’ worth of expenses in high-interest savings account so that you can access it at any time.

After that, you could put any additional funds into low risk, high liquidity vehicles like a money market account or a certificate of deposit (CD). When considering how to start an emergency fund, think twice before investing in securities, since it will likely take days to unwind any positions to receive the money.

“Not only should you keep emergency funds in a separate account from your regular checking and savings, but it’s even better to keep them at a different bank entirely,” Moriarty says. “Keeping them at a separate bank reduces the temptation to draw from them when you’re checking the balance of your other accounts. Out of sight, out of mind—until you really need them.”

3. Make contributions automatic

Similar to a retirement fund, it’s important to pay into your emergency fund first. When you start an emergency fund, set aside a certain percentage of your take-home pay each month and put it straight into your account.

You can set up either an automatic deposit on payday or a separate direct deposit with your employer as part of the steps to start an emergency fund.

But don’t stop there. Once you’ve started an emergency fund, find other creative ways to build your account even faster.

“When you start an emergency fund it can be challenging, but every few dollars helps,” says Brooke Petersen, an investment consultant at Conrad Siegel, an investment advisory firm in Harrisburg, Pennsylvania. “Fund it with pay from extra working hours, a tax refund or part of a raise. Alternatively, bring your lunch to work a few days a week, or brew your morning cup of coffee at home.”

4. Continue building when needed

Finally, it’s important to remember that just because you might have reached your long-term goal to start an emergency fund, you shouldn’t stop there. Your circumstances could change through marriage or the birth of a child, for example, and your monthly expenses might increase as a result.

When that happens you need to account for it. The six months’ worth of expenses you originally saved may no longer cover you. Additionally, if you need to tap into this account at any point, then you will need to begin the process to replenish the amount you took out.

When you start an emergency fund think of it as a type of insurance policy for you and your family. You have health insurance in case you get sick, car insurance so that you’re covered in an accident and an emergency fund if something unplanned or unexpected happens.

“The primary investment objective for your emergency reserves is safety, not return,” Petersen says.

By learning how to start an emergency fund now you can avoid serious financial problems later. Take the steps to start an emergency fund one by one, and you’ll have peace of mind before you know it.

How Much Money Should you Have in Your Emergency Fund?

One of the factors that have prevented many persons from starting an emergency fund is the lack of money. Some believe that they need to earn a lot of money before starting an emergency fund. But is that really the case? How much do you really need to start an emergency fund? Lets find out.

It is important to determine the right amount of cash to set aside to ensure that you do not over-pad your fund with money that could be used more wisely for other purposes.

Overfunding Emergency Savings

Most people worry about underfunding their emergency savings and leaving themselves exposed. However, they should also be concerned about overfunding their savings, where extra funds sit and do not issue any returns, which can hurt you.

You Are Losing Money

Because emergency funds must be accessible, the best place to save them is in a savings account at your bank or credit union, or with an online bank, where it can earn a higher interest rate than at a brick-and-mortar institution. But even at the higher end, your money is still only earning around 1% annually.

Your emergency fund, regardless of where you have it saved, doesn’t outpace inflation, so you are losing money. Having more in it than you need increases your losses.

You Are Missing Out on Funding Other Financial Goals

If you have too much money tied up in your emergency fund, then you are forfeiting opportunities to take care of other important financial “to do’s” such as contributing to retirement, paying off debt, or saving for a down payment on a home. Your money will be better-utilized, meeting one of those goals than over-padding your emergency savings. Why keep more than is necessary for what is essentially a cookie jar, when you could be paying off high-interest credit card debt?

Determining the Correct Fund Amount

To determine a sufficient amount of money to put away in an emergency fund, you should consider:

• An amount that you are comfortable putting away
• What can provide you with a sense of financial stability
• Your current work situation
• Your financial responsibilities.

Consider What’s Recommended

Typically, it is recommended that you save somewhere between three to six months of expenses in your emergency fund. Some experts recommend as little as a few hundred dollars to get you started with a beginner emergency fund, and some suggest as much as a year or more of your income.

In addition to considering the recommendations, keep in mind the specifics of your situation such as family size, whether you own or rent a home, the number of vehicles you lease or own, and job stability.

Treat Your Emergency Fund Like Insurance

Your emergency fund is essentially an insurance policy; you are protecting yourself if something goes wrong. So approach your emergency savings the same way you would approach covering yourself with, say, auto or life insurance.

You want to select enough coverage, but you don’t want to choose so much that you are wasting your money on premiums or, in this case, having your money sit around earning nothing.

Just as you might skimp on certain forms of insurance you don’t think you’re likely ever to use, so too can you go a bit lower on your emergency savings if you feel your financial position is relatively secure. If three months of expenses will be sufficient in your world and you can sleep at night with that number, then don’t feel swayed to go beyond that amount.

Consider Alternatives to Overfunding Your Emergency Savings

Having savings earmarked for emergencies will prevent you from borrowing in your time of need—whether it’s via credit card or from a friend or relative—and it will also help you avoid dipping into your retirement accounts.

That being said, if you do contribute to a Roth IRA, know that you can withdraw funds for medical expenses without penalties. There are also allowances for buying your first home.

Be mindful that you are unplugging money from earning interest, so this should be a last resort, but certainly, one to consider before covering your emergency with debt. Keep this in mind as a backup plan if you feel tempted to overfund your emergency savings.

Also, know that in the event of job loss, unemployment benefits will lessen the amount you need to pull from your savings, provided you are eligible.

Your Emergency Fund Should Support Your Financial Plan

Conventional wisdom may tell you the bigger your emergency fund, the better. But recognize that in overfunding your emergency savings, you may be hurting your bottom line.

While the answer to exactly how much should be in your fund is different for each person, consider these tips to determine the right emergency fund for you and avoid crossing the line into having too much in your savings. Make sure your emergency fund is working with your overall financial plan and not against it.

Where can I Build an Emergency Fund?

Here are four ways you can quickly build up your rainy day fund.

1. Sell something

You probably saw this coming. If you take a couple of hours to look around the house, you’ll be amazed at how many items (old kids’ toys, exercise equipment, dusty power tools, etc.) you could convert to cash. That’s much better than offering to pay your mechanic for a new alternator with an old treadmill that hasn’t run since Carl Lewis did.

2. Find one-time income opportunities

There are lots of chances to do some quick work and earn bucks inside and outside your home. You can answer online surveys, care for pets while their owners are on vacation, participate in focus groups, and more. You restock your emergency fund, and soft-drink companies learn which color they should use for their new labels. Win win!

3. Get a second job

None of us likes the thought of pulling extra hours when we’re already tired, much less being away from our families for that much longer. But even four weeks of an extra job can make a huge difference when Murphy comes calling. At that point, you’ll be relieved that you worked extra, rather than being relieved you didn’t.

4. Make cuts in your budget

Look at your budget and do a bunch of little cuts that you won’t notice individually but add up significantly. Turn the thermostat down a degree or two, clip some coupons, and cancel unnecessary services or memberships. The results could raise some eyebrows.

How Long Should it Take to Build an Emergency Fund?

Though, like anything worth pursuing, building an emergency fund takes time. And that leads us to a very important question: how long should it take you to build an emergency fund?

In short, it should take you between 6 and 18 months to build an emergency fund. As a rule of thumb, you should expect to spend twice as many months saving, as your emergency fund will cover. So, for example, you should plan to spend 12 months building a six-month emergency fund.

Whereas, if your goal is to build an emergency fund that covers 3 months of your living expenses, you should expect to spend 6 months saving.

For some people, it might take a little longer than that, while for others, it might take significantly less time. Since everyone’s financial situation is unique, it would be foolish for me to give you a specific timeline.

That said, since saving an emergency fund is so critically important to your long-term financial well-being, the faster you build one, the better off you’ll be. But let’s be honest, building an emergency fund isn’t the most exciting financial task to pursue.

Therefore, like ripping off a Band-aid, the sooner you get it out of the way, the sooner you can start working toward your more exciting financial goals.

What is Emergency Fund Used for?

An emergency fund is a readily available source of assets to help people navigate financial dilemmas, such as the loss of a job, a debilitating illness, a major repair to home or car—not to mention the kind of major national crisis the coronavirus pandemic has created.

The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses. It also reduces the need to either draw from high-interest debt options—such as credit cards or unsecured loans—or undermine your future security by tapping retirement funds.

An emergency fund should contain enough money to cover between three and six months’ worth of expenses, according to most financial planners. Note that financial institutions do not carry accounts labeled as emergency funds.

Rather, the onus falls on an individual to set up this type of account and earmark it as capital reserved for personal financial crises.

A married couple with expenses totaling $5,000 a month—including mortgage payments, food bills, car payments, and other necessary outlays—would need to set aside at least $15,000 (three months) and as much as $30,000 (six months) to address unexpected financial burdens.

The funds are typically held in the form of highly liquid assets, such as checking or savings accounts insured by the Federal Deposit Insurance Corporation (FDIC). These vehicles allow quick access to cash to pay expenses during an emergency situation.

How Much Should I Save Each Month for Emergency Fund?

Financial experts typically recommend having three to six months’ worth of living expenses set away in an emergency fund. But the exact amount depends on how much you earn annually after taxes.

Follow these three steps to calculate the amount you’d need to save in 2020 to set up a three-month emergency fund. Here, we’re using the median U.S. household income, which was just over $63,000 in 2018, as an example.

1. Figure out your take-home pay after taxes

To solve for your post-tax salary, multiply your total income by your tax rate, then subtract that number from your total salary. 

In this case, we multiplied $63,000 by 0.25 to represent a 25% tax rate, which is about how much the average U.S. taxpayer spends each year. That equaled $15,750. 

Then, we subtracted $15,750, the amount the average person would pay in taxes, from $63,000. That comes to $47,250 in take-home pay for a median income household.

It’s important to note that tax rate you end up paying is highly individual. That’s because U.S. tax rates are calculated on a marginal basis, which means that different levels of an individual’s income are taxed at varying rates.

If a single person earns a taxable income of $63,000 in 2020, the first $9,875 of that will be taxed at 10%. Then, the income between $9,875 and $40,125 would be taxed at 12% and their remaining taxable income after $40,125 would be taxed at 22%.

“This figure will vary a lot depending on the state or city where you reside, how much you earn, plus other personal factors, such as your 401(k) savings, whether you have kids, any tax deductions and more,” explains Douglas Boneparth, president and founder of Bone Fide Wealth. You can view the new tax brackets for 2020 here.

2. Divide your post-tax salary by 12 months

This will give you an idea of how much you bring home each month.

In this case, we divided $47,250 by 12 months, which means about $4,000 is the amount of money needed to fund one month of an emergency fund.

3. Multiply that number by three

For the median earner, $4,000 multiplied by three would make $12,000 the total amount of money needed for a three-month emergency fund.

If you want to solve for a six-month emergency fund, simply multiply your monthly expenditure by six.

Certain situations may require you to put away more or less than this plan suggests. If you regularly invest a lot each month, such as in a 401(k) account, or have expensive insurance premiums that impact your monthly take-home pay, you may need to adjust your per-paycheck emergency fund deposits. If you aren’t sure, you can always seek advice from a financial advisor.

What are Examples of Emergency Expenses?

Life is full of unexpected surprises. A car repair, illness and unemployment can catch you off guard and leave you financially stranded. When the unexpected happens, it’s important to have a stash of cash set aside in an emergency fund.

At a minimum, an emergency fund should consist of three months of your living expenses. If you pay $2,000 a month to cover the basics such as housing, utilities and food, then put aside $6,000 in your emergency fund. If you have dependents, your emergency fund should consist of six months of your living expenses.

Here are seven surprises that should motivate you to start or add to an emergency fund:

Job loss. Whether you’re laid off or decide to leave a job for personal reasons, an emergency fund provides a temporary income safety net to help pay for necessities.  

Medical emergencies. Even if you have health insurance, it doesn’t always cover the whole cost of care, especially if you or a family member is in need of an ambulance ride, a major surgery or physical therapy. And don’t forget about your pets! Veterinary visits, especially during an emergency, can be costly if you don’t have pet insurance.

Cost of living increases. A fluctuating economy can mean fluctuating bills and housing payments. Whether your rent skyrockets when you renew your lease or your heating bill climbs higher with the cost of energy, an emergency fund will allow you to cover these costs until you find a better financial alternative.  

Sudden moves. If your company is transferring you to a new office or you just accepted your dream job across the country, your employer will often help pay for your moving expenses – but not all the time nor always for the full amount. Movers, temporary housing and the cost of furnishing a new place can add up very quickly, so if you think a job-related location change is a possibility, make sure you have a cushion.

Car expenses. If driving is your main mode of transportation, a problem with your car isn’t only a headache, it impacts your ability to go to work, shop for groceries and fulfill other activities in your daily routine. Best case, an issue with your car requires replacement of minor parts.

At worst, you have to replace it entirely. Either way, car maintenance is expensive and often required suddenly. Having an emergency fund can help mitigate this always stressful situation.

Major household repairs. You may have insurance to cover some of the more common household issues, but if you have a high deductible, it might be a challenge to come up with the cash to cover repairs. Whether you’re watching the paint on your house crack in severe heat or your basement floods, rest assured that your emergency fund will be there to fall back on.

Unexpected travel. It may seem ominous to plan ahead for mourning, but if you lose a loved one, the last thing you want to worry about is travel costs. You also wouldn’t want the cost of a plane ticket to prevent you from being there for the birth of a relative or friend’s child. If you have to travel unexpectedly, your emergency fund can help keep charges off your credit card and ease stress.  

An emergency fund provides the reassurance of knowing you have money to fall back on during an unexpected life occurrence. If starting an emergency fund feels overwhelming, start small. Setting aside even a few dollars a week will help build up a reserve over time.

What do you do with Money After an Emergency Fund?

Once you’ve built your emergency fund, take a minute to congratulate yourself. Having a buffer of three to six months’ worth of living expenses safely tucked away is a huge relief — and a significant accomplishment.

But what’s next? Without a plan for the money you were putting away each month, it would be easy to embrace lifestyle creep. You likely have at least a few financial goals, so why not reallocate that cash toward new achievements? Here’s what to do now that you’re prepared for the unexpected.

Raise your credit score

Once you have your emergency fund in place, focus on improving your credit score. A strong score makes it easier to borrow money and make big buys like houses and cars at affordable interest rates (the same goes for renting). And your score might even be checked by utility companies and potential employers.

If you have consumer debt, like an outstanding credit card balance, paying it off can go a long way toward raising your score. And while boosting your credit score big-time can take months or years, smaller increases can happen in about a month.

One way to crank it up fast? Make sure you’re using only about 30 percent of the credit available to you. You can also ask your credit-card company to increase your available credit — just don’t start charging more, or you’ll defeat the purpose.

And while you’re at it, be sure that you’re doing the right things to keep your credit score high. “Always make payments on time, pay more than the minimum, and don’t close out old credit cards. Lenders want to see long, good history,” Michael Clark, a Certified Financial Planner and financial adviser at Keiron Partners, says.

Save for your retirement

If you haven’t yet made it a priority to prepare for retirement, start saving consistently now. Maximize your annual contribution to your 401(k) or other employer-sponsored retirement plan (especially if your employer offers a match — take that free money). If your company doesn’t offer a plan or you’re a freelancer, you have plenty of options. Take advantage of them.

Skeptical that you need to save for retirement? It’s time to change your mind. Social Security won’t be enough to provide for everyone who needs it, and it’s “unlikely that you can work forever,” says Ryan Huard, a Certified Financial Planner and president of Huard Financial Group.

Try to sock away 10 to 15 percent of your income into your retirement account, Clark says. You may need to trim your spending to get there, so do a financial check-in and see where you’re overspending — you might be able to easily chop your monthly bills or grocery tab.

Save for a home

If owning a house is one of your goals, do your homework first to figure out how much you can afford, says Peter Huminski, president and wealth advisor at Thorium Wealth Management. “As a general rule, you should not have more than a 36 percent debt-to-income ratio, including your home mortgage payment,” he says.

Here’s how to determine your debt-to-income ratio: Add up all your monthly debt payments and divide them by your pretax monthly income.

For example, if you earn $50,000 a year — or about $4,166 a month — you should keep all your debt payments under $1,500 a month. So if you’re already paying $100 a month on a student loan and $300 on a car loan, you’ll want your house payment to be $1,100 or less.

Once you know what you can afford, you can start saving for a down payment. Huard recommends saving for at least a 20 percent down payment, which is usually the minimum for avoiding extra fees. (However, if 20 percent seems out of reach, you still have options.)

Focus on your childrens education

Start saving for your kids’ education by opening 529 college savings accounts. “Every state offers them, and they are a great way to set up a systematic investment every week or month that goes toward the goal,” Huminski says. 

But remember, while funding a college education for a child or grandchild is a noble goal, your retirement should be your first priority, Huard says. “This is an area where you need to be a little selfish.

Never put off saving for your retirement to fund a child’s education,” he says. “There are all kinds of ways to fund college — work-study, scholarships, grants and student loans. When it comes to retirement, there are no loans or grants. You either have enough saved or you don’t.”

Not only can it compromise your retirement savings, but over-funding for college can also hurt your child’s ability to receive need-based financial aid, Huard adds. “The best owner of college savings dollars are grandparents,” he says.

“A grandparent can own a 529 college savings plan, while the grandchild is the beneficiary, and when it comes to applying for financial aid, those assets aren’t counted toward the expected family contribution.”

Grow your wealth

While you may be counting on getting a raise each year to increase your income, the best way to build wealth is to invest the money you’re making now: The top 1 percent of earners in the U.S. receive more than one-third of their income from investments, according to figures from the Congressional Budget Office. But you definitely don’t have to be a 1-percenter get in on that action and grow your wealth over time.

Read Also: How to Improve Your Financial Literacy

Investing some of your income is better than just stashing it all in savings accounts, where interest rates are low. To start investing, consider a mutual fund or exchange-traded fund (ETF), since they usually have lower fees as well as professional managers to keep them diversified. Do your research to make sure you understand how your money is being invested, and don’t be afraid to ask a financial adviser questions.

Work toward investing 10 percent of your income, recommends Bill Van Sant, CFP, senior vice president and managing director of Univest Investments. And commit to investing for the long term rather than constantly making changes to your account or panicking when the market drops. If you’re in it for the long haul, you will see results, Van Sant says.

Bottom Line

No one prays for emergencies, but you can plan for them by setting something aside. When proper arrangements are put in place with emergency funds, you can handle the situation with confidence.